WHAT POISONED AMERICA? MUST READ!

WHAT POISONED AMERICA?  MUST READ!

                Authored by Charles Hugh Smith via OfTwoMinds blog

America's financial system is nothing more than a toxic waste dump of speculation, fraud, collusion, corruption and rampant profiteering.

The question boils down to this: what problems cannot be addressed by the status quo?

The two that appear impervious to reform are 1) soaring wealth-income-power inequality and 2) the dominance of special interests. In both cases, the corporate foxes are guarding the hen house, so any reforms with real teeth are watered down to PR by those reaping the vast majority of the financial gains. Corporate profits are in the billions while you can buy elected officials' cooperation for mere millions. There is no way to get around that asymmetry.

I would propose an even deeper systemic poison: zero-interest yield on capital.  For a variety of reasons, the yield on capital is either zero or less than zero if we factor in inflation. We now earn (heh) 0.1% on our cash while inflation is somewhere between the "official" rate of 3% and more real-world measures between 5% and 10%.

This is a significant change from the days when savings (in savings and loans institutions) earned 5.25% by regulation.

While ordinary capital earns nothing (or less than zero), the capital and income of the top 0.01% has rocketed to unprecedented levels.

To understand why yields on capital have fallen to zero while wealth-income has flowed to the top elites, we need to look at wages share of the economy and capital's share of the economy. Wages share (i.e. labors' share) has been falling for the past 45 years, while corporate profits and the wealth of America's top tier has soared.

See chart below:

Relentles 50 years decline in wages

https://cms.zerohedge.com/s3/files/inline-images/wages-share-income7-19a%20%283%29.png?itok=IZtxB75L

It is not coincidence that as interest rates fell to zero the wealth and income of the top 0.01% soared while ordinary wage income fell 10% when adjusted for the purchasing power of the earnings.

What happens when the purchasing power of the earnings of the bottom 90% declines for decades?

Households cannot borrow as much money as they once could because their earnings simply don't go as far; there is less disposable income to support more debt service.

See Chart:

National income: Corporate profits before tax

https://cms.zerohedge.com/s3/files/inline-images/corp-profits2-21a.png?itok=g-GxzB5b

 

What happens when corporate profits skyrocket as jobs are offshored and corporations arbitrage all the goodies of globalization? The corporations don't need to borrow as much money as they have trillions in profits to work with.

In other words, demand for credit stagnates while at the same time, the Federal Reserve has flooded the economy with near-zero rate credit. Demand has stagnated along with wages while supply has rocketed into the trillions thanks to unprecedented central bank credit creation.

The reason why central banks have slashed rates to zero is obvious: if the bottom 90% can't borrow more money at 5% to consume more goods and services, they can certainly borrow more at 1.5% because the interest part of their monthly payment drops significantly.

In other words: as the purchasing power of wages has relentlessly declined, the "fix" is to substitute debt for earnings. The fact that eventually stagnating earnings cannot support more debt at any rate of interest is inconvenient, so it's been ignored.

Zero-interest rates has played out differently in Corporate America: since capital is so cheap to borrow, why not borrow a few billion dollars at 1.5% and use the money to buy back shares of the company's stock, which generates a hefty 10% annual increase in the share price? Indeed, why not?

The net result of near-zero yields on capital? The top 0.1% own more wealth than the bottom 80%. Roughly 75% of all income gains have gone to the top 0.01%.

See Chart:

The net result of near-zero yields on capital? The top 0.1% own more wealth than the bottom 80%. Roughly 75% of all income gains have gone to the top 0.01%.

See Chart:

The top 0.1%  now own more than the bottom 80%

https://cms.zerohedge.com/s3/files/inline-images/wealth-inequality4-20_3.png?itok=L0z4OdEt 

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SOURCE:  https://www.zerohedge.com/markets/what-poisoned-america

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